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Exam 9: Forming and Operating Partnerships

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Question 61

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If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

A) The partner will treat the distribution in excess of her basis as ordinary income.
B) The partner will treat the distribution in excess of her basis as capital gain.
C) The partner will not ever be taxed on the distribution in excess of her basis.
D) The partner will not be taxed on the distribution in excess of her basis until she sells her partnership interest.

E) A) and C)
F) None of the above

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Question 62

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A partnership with a C corporation partner must always use the accrual method as its accounting method.

A) True
B) False

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Question 63

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Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

In what order should the tests to determine a partnership's year-end be applied?

Which of the following items will affect a partner's tax basis?

The term "outside basis" refers to the partnership's basis in its assets, whereas the term "inside basis" refersto an individual partner's basis in her partnership interest.

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

What type of debt is not included in calculating a partner's at-risk amount?

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership. This partnership was created to sell a variety of cameras, picture frames, and other photography accessories. When it was formed, the partners received equal profits and capital interests, and the following items were contributed by each partner:Troy-cash of $3,000, inventory with an FMV and tax basis of $5,000, and a building with an FMV of $22,000 and adjusted basis of $10,000. Additionally, the building was secured by a $10,000 nonrecourse mortgage.Peter-cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with an FMV of $27,000 and tax basis of $20,000.Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $40,000 and adjusted basis of $3,500. Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment.What is each partner's outside basis, and how much gain (loss) must the partners recognize in 20X9, when Picture Perfect was formed?

What form does a partnership use when filing an annual informational return?

John, a limited partner of Candy Apple, LP, is allocated $29,500 of ordinary business loss from the partnership. Before the loss allocation, his tax basis is $19,500 and his at-risk amount is $9,500. John also has ordinary business income of $19,500 from Sweet Pea, LP, as a general partner and ordinary business income of $5,500 from Red Tomato as a limited partner. How much of the $29,500 loss from Candy Apple can John deduct currently?

Hilary had an outside basis in LTL General Partnership of $9,200 at the beginning of the year. LTL reported the following items on Hilary's K-1 for the year: ordinary business income of $4,200, a $9,200 reduction in Hilary's share of partnership debt, a cash distribution of $19,200, and tax-exempt income of $2,200. What is Hilary's adjusted basis at the end of the year?

Partners adjust their outside basis by adding nondeductible expenses and subtracting any tax-exempt income to avoid being double taxed.

What general accounting methods may be used by a partnership, and how and by whom are they selected?

On 12/31/X4, Zoom, LLC, reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000in charitable contributions, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

Lloyd and Harry, equal partners, form the Ant World Partnership. During the year, Ant World had the following revenue, expenses, gains, losses, and distributions: Given these items, what amount of ordinary business income (loss) and what separately stated items should be allocated to each partner for the year?

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000, respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15 percent profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 from Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state law, the partners shared responsibility for this debt in accordance with their loss-sharing ratios. What is each partner's tax basis after adjustment for these transactions?

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

On 12/31/X4, Zoom,LLC, reported a $58,500 loss on its books. The items included in the loss computation were $29,000 in sales revenue, $14,000 in qualified dividends, $21,000 in cost of goods sold, $49,000 in charitable contributions, $19,000 in employee wages, and $12,500 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?